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Taxing Times
Dear Jeff:
My ex-husband and I accumulated several rental properties over the past 38 years that were split 50-50 after our divorce two years ago. I was asked why we didn't form a corporation. My ex does not want to do this. Is it possible for me to form a corporation for my share of the rental properties? I have no personal write-offs and the IRS is killing me.
I also have invested a little with Edward Jones in July '98. I have $5,000 in a tax-free money market fund and $2,000 in Washington Mutual funds. I've been considering investing $2,000 in ConAgra stock, do you think this is a good idea? Has what I've done so far seem OK to you? I know very little about investing, it all seems so complicated and confusing. I'm afraid of making a mistake and losing it all. I am 59 years old and worry that I'm too old to be investing. What I want to know is am I doing the right thing or should I forget about it? Thanks, Phyllis Jeff Says:
Just mention the word "taxes" and most people's stomachs start to turn! It is easy to understand why we just cringe thinking about paying our "fair share" of income taxes. But, the old saying "you can pay me now or you can pay me later" is also true about income taxes. IRAs and retirement plans do reduce current income tax liability, but they simply postpone the obligation to pay. I recognize the advantages of tax deferral, but sooner or later you pay. There are very few ways to actually avoid taxes. Conducting your real estate business in the form of a corporation will not necessarily help you either.
A typical "C" corporation is treated for tax purposes as a separate tax paying entity. So, if your rental income is paid directly to the corporation, it will pay the taxes due on the income, net of allowable deductions, even if you do not personally take an income from the corporation. There is another common tax problem when corporations own real estate. When the corporation ultimately sells the property, the corporation will then have to pay a capital gains tax on the profit. If the corporation then distributes money to you, you will also have to pay taxes on the money received. This is known as the double taxation problem.
My advice is: consult with a tax advisor or CPA. Taxes are very complicated, but you may be able to reduce your tax burden with appropriate planning from a qualified professional. He or she can also help you determine the business entity under which you should be operating.
When it comes to your investment portfolio, I repeat: consult with an advisor. You state that you find investments complicated and confusing and that you are afraid of making a mistake. If you truly feel this way and do not want to worry, at least as little as possible, then please do not try to invest on your own. Working with an advisor can help you learn about investing while simultaneously reducing the worry of big mistakes initially. You may ultimately feel comfortable enough to handle your investment planning independently, but you can decide to do that when you are ready. Based on your question, however, I do not think you are ready yet.
To find a financial pro check out my article on How to Find a Financial Planner.
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